The IMF is starting to think that 'neoliberalism' has created an inequality problem

IMF managing director
Christine Lagarde. Lagarde is not one those questioning the
neoliberal consensus.REUTERS/Charles
Platiau

Some of the most senior economists within the International
Monetary Fund — often dubbed the "central bank's central bank" —
are beginning to question parts of the neoliberal consensus that
has dominated economic thinking for the past three decades.

In
an article published by the fund this week, economists
Jonathan Ostry, Prakash Loungani, and Davide Furceri argue that
they see a growing movement against some of the principles of
neoliberalism, and believe that two key areas of neoliberalism —
namely the free movement of capital across borders, and the
enforcement of austerity measures by global governments — are
starting to hinder, rather than help the world.

Here's an extract from the article (emphasis ours):

There is much to cheer in the neoliberal agenda. The expansion of
global trade has rescued millions from abject poverty. Foreign
direct investment has often been a way to transfer technology and
know-how to developing economies. Privatization of state-owned
enterprises has in many instances led to more efficient provision
of services and lowered the fiscal burden on governments.­

However, there are aspects of the neoliberal agenda
[austerity and capital liberalisation] that have not delivered as
expected.

The post goes on to say that: "An assessment of these
specific policies (rather than the broad neoliberal
agenda) reaches three disquieting conclusions." Ostry, Loungani,
and Furceri's "disquieting conclusions" are as follows:

It is pretty hard to actually establish, "when looking at a
broad group of countries" whether neoliberal policies have
actually helped growth.

The increase in inequality is "prominent".

Increased inequality caused by specific parts of
neoliberalism "hurts the level and sustainability of growth."

Here's more from the report (emphasis ours):

Since both openness and austerity are associated with increasing
income inequality, this distributional effect sets up an adverse
feedback loop. The increase in inequality engendered by financial
openness and austerity might itself undercut growth, the
very thing that the neoliberal agenda is intent on
boosting. There is now strong evidence that inequality
can significantly lower both the level and the durability of
growth.

The evidence of the economic damage from inequality suggests that
policymakers should be more open to redistribution than they are.
Of course, apart from redistribution, policies could be designed
to mitigate some of the impacts in advance—for instance, through
increased spending on education and training, which expands
equality of opportunity (so-called predistribution policies). And
fiscal consolidation strategies—when they are needed—could be
designed to minimize the adverse impact on low-income groups.

Since the late 1980s and the so-called Washington Consensus,
neoliberalism — essentially the idea that free trade, open
markets, privatisation, deregulation, and reductions in
government spending designed to increase the role of the private
sector are the best ways to boost growth — has predominated in
the thinking of the world's biggest economies and international
organisations like the IMF, and the World Bank. However since the
2008 financial crisis, there has been a groundswell of opinion in
both economic and political circles to suggest that the
neoliberal consensus is the right way forward for the world.

In his FT interview, Ostry added that even being allowed to put
the article in an official IMF publication showed how much things
are starting to move away from the orthodoxy in terms of economic
thinking. The post definitely doesn't represent the "mainstream
culture" of the IMF he said, adding that "cultures are slow
moving things."